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MGM Resorts Balanced at Neutral

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We maintain our long-term Neutral rating on MGM Resorts International (MGM - Analyst Report). We are optimistic on the company’s strong brand name, expected strong RevPAR in 2012, facelifts at properties, international expansion and improvement in balance sheet. But the negative impact of competition, increased dependence on debt and sluggish recovery at Las Vegas compel us to remain on the sidelines.

We see the company’s huge brand image as one of its key growth drivers. The company’s convention bookings for 2012 appear strong, and its FIT and leisure bookings are growing, implying an overall improvement in room revenue across the board. Hence, the company expects to earn strong RevPAR throughout 2012, topping the impressive growth in 2011.

In 2012, we expect the company to witness further improvement through a refurbishment program. MGM Resorts expects to spend around $350 million in capital in 2012. The company also remains committed to expand globally especially in emerging markets. Apart from its solid functioning at Macau, MGM also expects to have some properties in several other cities in China such as Beijing, Shanghai, Tianjin and Nanjing. The company is also in an agreement to offer hospitality in Mumbai, India by building a Bellagio, an MGM Grand and an MGM Skywalk.

Last but not the least, MGM remains focused on improving its balance sheet by rearranging its debt profile through interest rate cut as well as maturity period extension.

In terms of headwinds, competition remains a threat. With more hotels opening and promotional activities increasing in Macau and Las Vegas, competition will likely intensify. In addition, while one of its close peers Wynn Resorts Ltd. (WYNN - Analyst Report) already received the entry card to expand in Cotai, MGM is still to get the green signal. Another peer of the company, Las Vegas Sands Corp. (LVS - Analyst Report), is also operating at Cotai.

Moreover, business at Las Vegas remained relatively weak in terms of table game hold in March 2012. Too much dependence on debt financing remains another cause of concern. As of March 31, 2012, the company had approximately $13.4 billion principal amount of indebtedness outstanding while the company’s total cash balance was $1.6 billion. MGM Resorts currently retains a Zacks #3 Rank (short-term Hold recommendation).

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